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Student loans: Will Congress's remedy favor middle class over poor?

Student loans subsidized by the federal government will become more expensive soon unless Congress acts to keep interest rates low. But Pell grants, which benefit low-income students, also face cuts, analysts note.

By Staff writer / April 25, 2012

President Barack Obama greets people before speaking at the University of Iowa, Wednesday, April 25, in Iowa City.

Carolyn Kaster/AP

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The surging student loan burden has the attention of President Obama and Congress. A jaw-dropping fact has become widely publicized: that student debt for the first time totals more than $1 trillion, well over the amount Americans owe on credit cards.

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But even as politicians consider fixes – especially how to avert an interest-rate hike affecting students come July 1 – the grant-style aid that's most important to lower-income students is already experiencing a budget squeeze.

Is this election-year politics as usual, in which the interests of middle-class families who are more likely to vote take priority over those of poorer households, which are less likely to vote?

That's the way some analysts of education policy see it, as Mr. Obama makes an all-out pitch this week to prevent a doubling of interest rates, to 6.8 percent, on federal student loans.

Obama appealed for congressional action in appearances Tuesday at the University of North Carolina and the University of Colorado, and on Wednesday took his case to the University of Iowa.

Mark Kantrowitz, a financial aid expert who founded a popular website on the subject, FinAid.org, says providing relief for college-loan borrowers is a good idea, but that policymakers appear to be forgetting about the grants that widen access for more Americans to enter college. 

"The Pell grant [can determine] whether a student can enroll or graduate from college," Mr. Kantrowitz says. "To the extent that we're trading off one form of student aid for another ... I think we have things a little bit backwards."

He says it will cost about $6 billion over the next year to prevent the interest-rate jump, for college students who take out Stafford loans after July 1. 

The interest rates will affect the cost of college for a wide range of borrowers, middle- and low-income alike. The Pell grants, in addition to determining whether many low-income students can enter college at all, leave recipients with a lower debt load upon graduation.

Budget legislation last year in effect tightened Pell grant budgets, by narrowing eligibility rules. The grants are now capped at 12 semesters per student, down from 18 semesters, and income-based qualifying standards have been tightened.

This comes after years in which Pell grant disbursements expanded, in part because the recession prompted more young Americans to seek college degrees. At the same time, however, rising tuition and fees mean the grants cover a much smaller share of college costs than they used to.

The squeeze on Pell grants reflects tight budgetary times. Large federal budget deficits, with no end in view, are causing Congress to focus more intently on fiscal restraint. But many finance experts say the long-term fiscal threat lies in the instability of mammoth programs such as Medicare and Social Security, much more than in smaller items like student aid.

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